29th June 2021
Take the first few steps to property investment
The buy-to-let market in the UK is still thriving. With property prices going up across most of the country, many people still turn to living in rented accommodation. This demand has led to a rise in monthly rent payments, meaning buy-to-let can be a profitable investment (it’s generally outperformed shares for the past 20 years).
Mark Kraven, Lettings Manager at Peter Ball & Co in Cheltenham explains: “Some people come to us not necessarily needing a mortgage for a buy-to-let property. They’ve come into some money and, rather than starting something like an ISA or putting it into a building society, they’ve decided they’re going to invest in property.”
If you’re thinking of taking your first step on the buy-to-let property ladder, then it’s a good idea to do your research before you do anything else. Keep a close eye on the property market, get to know the areas you’re interested in and consider the types of tenant that tend to live there: will you be trying to attract young professionals, families or students, for example. This will help you decide which type of property to go after and invest in. Get it wrong and it could be hard to make the profit you’re after. Worse still, you could make a loss.
Mark adds: “Do you want to put all your money into one property, or diversify and spread it across two or three units? The latter option can help minimise risk.”
How you could make money over time
You should think about a buy-to-let property as a medium to long-term investment, and very different from owning your own home. You could earn a profit in two different ways:
- Rental yield: this is amount your tenant pays in rent, minus your maintenance/repair costs and any agent fees.
- Capital growth: if the local housing market is on the up and up, it might be that you sell your buy-to-let property for a profit in the future. Your profit comes from selling the property for more than you originally paid.
Flats will usually deliver a better gross yield. With a house, there can be less short-term benefit, but capital growth can come into play in the future. If you make a profit when you sell your buy-to-let property, you’ll be liable to Capital Gains Tax, and it’s highly likely you’ll pay income tax on the rent payments you get in too
What’s different about a buy-to-let mortgage?
A buy-to-let property needs a buy-to-let mortgage. This type of loan may carry a higher interest rate than a mortgage for your own home. Your residential mortgage and the amount you can borrow is based on your salary and outgoings. When it comes to a buy-to-let mortgage, it’s dependent on the rental income you’re hoping to get in.
As with a residential mortgage, the bigger the deposit, the better deal you can get from the lender. A lower mortgage rate lowers your monthly mortgage payments, so you’ll end up with a greater difference between your rental income and mortgage costs. “If you’re buying a property with the intention of renting it out to students, the mortgage process may be more complex,” Mark adds.
You’ll also need buildings insurance with a buy-to-let mortgage
What other costs are involved?
You will pay all the usual costs that come with buying a property, such as survey fees, solicitor’s fees and stamp duty. “You do need to factor in the ‘out of pocket’ expenses when you’re a landlord,” explains Mark. “The average service charge in this area for a flat is £50-60. When you’re buying a property in a block of flats or apartments, the landlord is responsible for the upkeep of the building, so that means covering any building or development charges.”
Void periods (where there is no tenant in the property) used to be, on average, a minimum of one month out of twelve for let properties. Now that the average tenancy lasts more than two years, these void periods are less frequent: good news for landlords.
The risk of non-payment by tenants is, unfortunately, a lot higher than it used to be after the developments of the past 15 months. Landlord insurance isn’t a legal requirement, but it’s worth considering a policy that covers the non-payment of rent
Remember: if a tenant comes to the end of their agreement and moves out, and there’s no rent coming in for a period of time, you still need to make your mortgage repayments and cover any other ongoing costs you have!
There’s more to being a landlord than you might think:
With being a landlord comes important legal and safety responsibilities before you can move a tenant in, including regular gas and electrical checks. It’s about more than just taking care of the odd repair and giving the place a lick of paint every few years.
“You need to think about exactly what you want out of a buy-to-let property,” Mark explains. “Do you want a safe bet and a quiet life; or have you got the time and commitment to try to maximise the potential profit? If you’re renting out an HMO (house in multiple occupation) for example, you have more tenancy agreements to deal with, and you may have the odd empty room at times.”
A practical space that’s presented well and feels safe will help you achieve the best monthly rental figure possible. Mark advises on how to get someone in quickly and easily: “Ideally, you should buy somewhere that’s ready to go. With period properties, it can take time to get them ready for tenants, and cost money to do it: two months can turn into three or four without any rental payments coming in. If it’s that long, it’s unlikely you’re going to make the money back.
“I advise most clients to rent out their property as unfurnished: it can increase the likelihood of the tenant staying longer term if they’re making the place their own with their own furniture”.
So, is buy-to-let for you?
- Do you like the idea of an investment that feels more tangible than investing in stocks and shares?
- Is tying your money up for a medium to long period of time something you’re comfortable with?
- Property prices and can go down as well as up, which could affect your financial ambitions.
- There’s the chance that you may not achieve a profit month-to-month on your buy-to-let property, or when you come to sell it.
- Are you fully aware of all the costs, time and responsibilities that come with owning and maintaining an additional property, and being a landlord?
There is money to be made in the buy-to-let market, and investing in bricks and mortar rather than the stock market is the way to go for many people. Taking the next step, purchasing a property and becoming a landlord could be right for you too!